CIHM 
Microfiche 
Series 
(l\/lonographs) 


ICI\/IH 

Collection  de 
microfiches 
(monographies) 


Canadian  Inatltuta  for  Hiatorieal  MteroraprodHCtiona  /  Inatitut  Canadian  da  mieroraproductiona  niatoriquaa 


1995 


Technical  and  Bibliographic  Notes  /  Notes  technique  et  bibliographiques 


The  Institute  has  attempted  to  obtain  the  best  original 
copy  available  for  filming.  Features  of  this  copy  which 
may  be  bibliographically  unique,  which  may  alter  any  of 
the  images  in  the  reproduction,  or  which  may 
significantly  change  the  usual  method  of  filming  are 
checked  below. 


0 


Coloured  covers  / 
Couverture  de  couleur 


I     i     Covers  damaged  / 

—      Couverture  endommagee 

I     [      Covers  restored  and/or  laminated  / 
Couverture  restauree  et/ou  pelllculee 

I     I      Cover  title  missing  /  Le  titre  de  couverture  manque 

I     I      Coloured  maps/ Cartes  g^ographiques  en  couleur 

I     I      Coloured  ink  (i.e.  other  than  blue  or  black)  / 

Encre  de  couleur  (i.e.  autre  que  bleue  ou  noire) 

I     I      Coloured  plates  and/or  illustrations  / 
Planches  et/ou  illustrations  en  couleur 

I     I      Bound  with  other  material  / 

Relie  avec  d'autres  documents 

I     I      Only  edition  available/ 
' — '      Seute  edition  disponible 

I  I  Tight  binding  may  cause  shadows  or  distortion 
along  interior  margin  /  La  reliure  serree  peut 
causer  de  I'ombre  ou  de  la  distorsion  le  long  de 
la  marge  interieure. 

I  I  Blank  leaves  added  during  restorations  may  appear 
within  the  text.  Whenever  possible,  these  have 
been  omitted  from  filming  /  II  se  peut  que  ceitaines 
pages  blanches  ajoutSes  lors  d'une  restauration 
apparaissent  dans  le  texte,  mais,  kxsque  cela  «tait 
possible,  ees  pages  n'ont  pas  ete  filmSes. 


L'Institut  a  microfilme  le  meilleur  examplaire  qu'il  lui  a 
ete  possible  de  se  procurer.  Les  details  de  cet  exem- 
plaire  qui  sont  peut-6tre  uniques  du  point  de  vue  bibli- 
ographique,  qui  peuvent  modifier  une  image  reproduite 
ou  qur  peuvent  exiger  une  modifications  dans  la  meth- 
ode  normale  de  filmage  sont  indiques  ci-dessous. 

I     I     Coloured  pages/ Pages  decoulfur 

I     I      Psges  damaged  /  Pages  endommagees 

I     I      Pages  restored  and/or  laminated  / 
Pages  restaur^s  et/ou  pellicultes 

\y]      Pages  discoloured,  stained  or  foxed  / 
Pages  decdor^s,  tachetees  ou  piquees 

I     I     Pages  detached/ Pages  d^tachtes 

[7|      Showthrough  /  Transparence 

I     I      Quality  of  print  varies  / 

—      Quality  inhale  de  I'impression 

I     I      Includes  supplementary  material/ 

Comprend  du  materiel  supplennentaire 

I  I  Psges  wholly  or  partially  obscured  by  errata 
slips,  tissues,  etc.,  have  been  refilmed  to 
ensure  the  best  possible  image  /  Us  pages 
totalement  ou  pattiellement  obscurcies  par  un 
teuillet  d'errata,  une  pelure,  etc.,  ont  ete  tilmees 
i  nouveau  de  fagon  a  obtenir  la  meilleure 
image  possible. 

I  I  Opposing  pages  with  varying  colouration  or 
discolourations  are  filmed  twice  to  ensure  the 
best  possible  image  /  Les  pages  sopposant 
ayant  des  colorations  variables  ou  des  decol- 
orations sont  fllm^es  deux  fois  afin  d'obtenir  la 
meilleur  image  possible. 


D 


Addittonal  comments/ 
Commentaires  suppl^mentaires: 


This  iitm  11  f  ilmad  at  th<  reduction  ratio  ctxcked  Mow/ 

Ct  docuiiMiit  «t  filmi  au  taux  dc  rMuetion  indiqirf  ci-dc»oui. 


lOX 

1— 1 

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^_^^ 

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t8X 

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2SX 

mx 

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r 

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12X 

tCX 

»x 

24X 

b^_^ 

2RX 

I— — 1 

J 

Ux 


Tha  copy  (ilmad  hara  has  baan  raproduead  ttianka 
to  tha  ganarotity  of: 

National  Library  of  Canada 


L'axamplaira  filmt  (ut  raproduii  grica  1  la 
gtntrotit*  da: 

Bibliotheque  nationale  du  Canada 


Tha  imagaa  appaaring  hara  ara  tha  baat  quality 
poMibIa  contidaring  tha  condition  and  lagibility 
of  tha  original  copy  and  in  Itaaping  with  tha 
filming  contract  apacificationa. 


Lat  imagat  tuivantat  ont  ttt  raproduitat  avac  la 
plus  grand  toin.  compta  tanu  da  la  condition  at 
da  la  nattat*  da  l'axamplaira  film*,  at  »n 
conformity  avac  lat  condition*  du  eontrat  da 
filmaga. 


Original  capiat  in  printad  papar  covara  ara  fllmad 
baginning  with  tha  front  covar  and  anding  on 
tha  iatt  paga  with  a  printad  or  illuttratad  impraa- 
(ion,  or  tha  back  covar  whan  approprlata.  All 
othar  original  copiaa  ara  filmad  baginning  on  tha 
first  paga  with  a  printad  or  illuatratad  impraa- 
sion,  and  anding  on  tha  laai  paga  writh  a  printad 
or  illuatratad  imprattion. 


Tha  iaat  racordad  frama  on  aach  microflcha 
shall  contain  tha  tymtaol  — ^  (moaning  "CON- 
TINUED "I.  or  tha  symbol  ▼  Imaaning  "ENO'l. 
whichavar  appliat. 


La*  axamplairas  originaux  dont  la  couvartura  an 
papiar  ast  Imprimta  sont  film^s  an  cemmancani 
par  la  pramiar  plat  at  an  larminant  soil  par  la 
darniAra  paga  qui  comporta  una  amprainta 
d'imprassion  ou  d'iilustration.  soil  par  la  sacond 
plat,  talon  la  eaa.  Tous  las  autras  axamplairas 
originaux  sont  filmtt  an  commandant  par  la 
pramiAra  paga  qui  comporta  una  amprainta 
d'impraasion  ou  d'iilustration  at  an  tarminant  par 
la  darniAra  paga  qui  comporta  una  taila 
amprainta. 

Un  daa  tymbolat  luivantt  tpparaitra  tur  la 
darnlAra  imaga  da  chaqua  microfich*.  talon  la 
eat:  la  tymboia  —^  tignifia  "A  SUIVRE".  Is 
tymbola  V  tignifia  "FIN". 


Mapa,  platas,  charts,  ate.  may  ba  filmad  at 
diffarant  raduction  ratios.  Thosa  too  iarga  to  ba 
antiraly  Includad  in  ona  axposura  ara  filmad 
baginning  in  tha  uppar  laft  hand  cornar,  laft  to 
right  and  top  to  bottom,  as  many  framat  as 
raquirad.  Tha  following  diagrams  illustrata  tha 
mathod: 


Las  cartas,  planchas,  tablaaux,  ate.  pauvant  itre 
fiimto  k  daa  taux  da  reduction  diff Arents. 
Loriqua  la  documant  att  trop  grand  pour  itra 
raproduit  an  un  taul  ciichA.  il  att  filmA  A  partir 
da  I'angla  tupAriaur  gc  jcha,  da  gaucha  i  droits, 
at  da  haut  an  bat,  an  pranant  la  nombra 
d'imagat  nAcattaira.  Las  diagrammat  suivants 
illustrant  la  m*thoda. 


1  2  3 


1 

2 

3 

4 

5 

6 

fMOOCOn  liSOlUTKm  ikt  chui 

lANSI  „„d  ISO  TEST  CHART  No.  2] 


^  APPLIED  IM^GF    In, 

^K  '653   Cast   Mam   SUeti 

Sr^  ^Dchesle,.   Me.   ro.k         1*609       usa 

r.^  ('16)   482  -  0300  -  Phone 

^^  (^16)  388  -  5989  -  Fo. 


■    4J,7. 


ABNORMAL, 
AMERICAN 


i     WALKER 


__.^ 


ABNORMAL     FEATURES     CF 
AMERICAN    BANKING. 


ADDRESS  BY  B.  E.  WALKER, 

PRESIDENT  OF  THE   CANADIAN    BANK    OF   COMMERCE, 

Given  at  the  Mertisg  op  tub  American  Bankers'  Association, 
Denver,  Colorado,  30tii  September,   1U()8. 


Somebody  once  said  to  a  celebrated  English  statesman, 
renowned  for  his  clear  perceptions  of  all  economic  subjects, 
"I   suppose   you   understand   all   about   the   currency"— to 
vfhich  the  reply  was,  "  No,  indeed  I  do  not,  but  I  believe  there 
are  people  who  do."     Most  of  us  are  willing  to  admit  that  the 
currency  is  a  complicated  mystery.     We  may  feel  sure  that  we 
can  trace  the  effect  on  the  general  financial  situation  of  this 
or  that  particular  factor,  but  we  have  to  confc':,  that  we 
cannot  balance  the  effect  of  all  of  the  factors  and  state  clearly, 
even  after   a    panic,   what   has  caused  tlie  disturbance  and 
v,rhat    we    must    guard    afainst    in    future.     But  when  we 
consider  the  currency  and  banking  system  of  the  United  St'ites, 
and  remember  what  we  have  experienced  in  the  panics  of  1873, 
1890,   1893  and    1907,  we  need  not  hesitate  to  admit  that 
somsthing  is  radically  wrong,  whether  we  can  agree  either  as  to 
the  disease  or  as  to  the  remedy.     I  have  ventured  by  my  title 
to  suggest  that  there  are  abnormal  features  in  United  States 
banking,  and  this  presumes  that  banking  can  be  reduced  to 
norms,  and  that  aberrations  therefrom  can  be  demonstrated  as 
such.     I  am  not  sure,  however,  that  many  clear  principles  in 
banking  can  be  set  out  which  are  applicable  everywhere.     As 
a  rule  the  banking  and  currency  of  a  country  have  been  inter- 
cepted in  their  natural  development  by  the  effect  of  war  or 
by  unwise  creation  of  public  debt,  and,  unfortunately,  some- 


times  by  the  mere  ignorance  of  legislators.  When  the  natural 
trend  of  the  banking  o'.  any  country  has  been  thus  thwarted, 
time  usually  brings  about,  either  by  direct  reform  or  by 
artificial  compromises,  such  adjustments  as  are  necessary  to 
make  the  banking  system  reasonably  useful  to  the  country 
which  it  is  supposed  to  serve. 

In  naming  the  prominent  causes  of  deflection  I  placed 
ignorance  last,  but  perhaps  it  should  be  placed  first.     As  the 
great  English  statesman  hinted,  few  understand  the  currency, 
and  the  country  which  in  its  constructive  period  possessed 
an.ong  its  citizens  a  genius  who  among  his  other  great  deeds 
as  soldier  and  statesman  was  determined  to  restore  the  dis- 
ordered finances  of  his  country  and  to  set  in  the  right  path 
for  the  future  the  great  industrial  agency  of  banking,  was  un- 
usually fortunate.     Such  a  country  was  the  United  States  at 
the  close  of  the  eighteenth  century,  and  such  a  citizen  was 
Alexander  Hamilton.     He  doubtless  knew  little  about  cur- 
rency  and    banking   when    he   began,  and   we   can   almost 
see   his   mind    turning,   in  the   weltering   confusion   of   the 
time,   from    one    expedient    to    another    in    order   to  find 
a   course   which    was  sound    financially  and   at    the    same 
time   suited    to    the    poverty    of   a    country    possessing    a 
depreciated  currency  and   no  capital  with  which  to  create 
banks.     He  had  about  him  the  two  usual  types  of  advisers— 
those  who  were  willing  to  try  any  course  of  reckless  folly  in 
order  to  escape  from  the  present  evils;   and  those  who,  while 
bewailing  the  evils,  were  unwilling  to  depart  from  the  narrow- 
est course  of  safety.     This  second  class  we  have  always  with 
us— men  only  too  ready  to  criticize,  to  point  out  dangers  they 
are  too  timid  to  face,  but  never  ready  themselves  to  suggest 
a  remedy  for  the  evils  to  be  dealt  with.     There  were  happily 
in  those  early  days  a  few  men  of  courage,  sanity  and  intelli- 
gence in  finance  besides  Hamilton,  such  as  Morris,  Gallatin 
and  others,  but  the  man  of  distinctly  constructive  ability  was 
Hamilton.      It  does    not  seem   to   be   material   that  some 
of  his  views  regarding  finance  have  been  shown  by  time  to  be 
unsound,  or  that  he  was  trying  not  so  much  to  discover  the 
abstract  principles  of  banking  as  to  mend  the  broken  fortunes 


of  both  state  and  individual  by  trying  to  .'itablish  banking 
and  public  and  private  credit  on  a  sounder  basis.     I'nfortuii- 
ately— very  unfortunately  in  my  opinion— there  was  a  line  of 
political  cleavage  of  vast  importance,  which  influenced  pro- 
foundly the  discussion  of  banking  then,  and   whi.h  still  re- 
mains  the   fundamental   dif!icult\    in    the   path   of    reform. 
Hamilton  strove  with  all  his  mighi     r  everything  which  would 
make  a  strong  central  power,  h.    .teing  unable  to  conceive 
how  a  great  nation  could  otherwise  be  created.     The  extent 
to  which  the  thirteen  units  of  government  then  joining  in 
the  United  States  should  retain  or  give  up  their  powers  of 
government  was  a  matter  of  compromise,  but,  I  fancy,  Hamil- 
ton would  have  approved  of  the  plan  we  adopted  in  Canada 
in  1867 — that  is,  to  give  the  Provinces  certain  powers  and 
reserve  all  other  phases  of  sovereignty  for  the  Federal  Govern- 
ment.    Among  the  powers  possessed  only  by  t!ie   Federal 
Government  in  Canada  is  that  relating  to  banking;  but  in 
the  nascent  United  States  the  thirteen  States  already  pos- 
sessed many  small  banks  and  besides  this  the  fear  of  the  con- 
centration of  power  of  any  kind    was  widespread.      Apart 
from  these  obstructions  to  a  sound  course,  the  country  did  not 
possess  the  capital  with  which  to  create  a  great  industrial 
bank.    The  fear  of  partial  ownership,  including  the  control  of 
the  stock,  by  the  state,  existed  among  manv,  very  rightly  I 
think;  and  the  fear  that  a  great  bank  of  which  the  control  was 
owned  privately  might  fall  under  the  power  of  foreigners, 
perhaps  of  England,  was  certainly  natural  enough  at  that 
time.     In  the  midst  of  such  difficulties  the  first  Bank  of  the 
United  States  was  founded,  hut  in  a  few  years,  and  while,  as 
we  can  now  plainly  see,  it  was  doing  its  allotted  work  very 
well  indeed,  it  was  strangled  by  those  wt.o  favoured  the  small 
banks.     Almost  immediately  the  second  Bank  of  the  United 
States  followed,  only  to  meet  a  similar  fate  at  the  hands  of 
Jackson.     Thus  for  the  second  time  a  system  of  banking 
which  might  have  made  the    ountry  strong  to  meet  financial 
emergencies,    which    tended    already   to   make   the   va-'ous 
scattered  parts  of  the  country  cohere  in  commercial  matters, 
which  was  rapidly  creating  credit  in  Europe,  and  which  with 


all  the  inevitable  faults  of  youth  was  performing  the  function! 
claimed  for  it  remarkably  well,  was  destroyed  in  favour  of 
an  incoherent  system  of  individual  state  banks. 

I  am  a  foreigner,  but  as  five  of  the  establishmints  included 
in  the  bank  of  which  I  am  President  arc  situated  in  cities  of 
the  United  States,  I  hope  you  will  not  regard  me  as  a  foreigner 
for  the  moment.     There  are  very  tew  banks  in  the  whole 
country  who  have  a  larger  interest  in  the  soundness  of  your 
banking  and  in  your  freedom  from  panics  than  my  own  bank. 
Remembering  my  peculiar  position,  I  am  particularly  desirous 
not  to  wound  the  susceptibilities  of  any  of  my  hearers,  but  I 
hope  it  is  safe  to  say  that  Alexander  Hamilton  was  clearly 
the  leading  intellect  in  that  wonderful  group  of  men  who 
framed  the  constitution.     At  a  time  when  few  men  could 
withstand  the  onrush  of  new  ideas,  largely  visionary  and 
false,  which  accompanied  the  French  Revolution,  Hamilton 
was  unshaken  in  his  clear  vision  as  to  the  future  of  his  country, 
and  few  will  deny  that  where  you  followed  his  advice  -oii 
did  well,  and  where  you  opposed  it  you  did  not  alwavs  act 
wisely.     It  miiy  be  argued  that  neither  of  the  two  Banks  of 
the  United  States  were  so  admirable  in  their  careers  that  we 
need  sigh  over  their  removal,  but  we  can  only  judge  them  by 
comparison  with  the  smaller  banks  of  the  same  period.     In 
your  colonial  and  revolutionary  times  you  had  a  curiously 
full  and  varied  experience  in  banking  and  currency.     Fiat 
money,  depreciated  coinage,  currency  based  on  land,  clamour 
by  debtors  for  cheaper  money  with  which  to  pay  debts,  were 
all  amply  experienced.     In  the  following  period,  contempor- 
aneously with  the  first  and  second  Ba.iks  of  the  United  States, 
you  passed  through  a  time  largely  of  mania  in  banking;    a 
time   when    history    was   recording    for   this  country    such 
fundamental  facts  as  that  banks  cannot  establish  a  capital 
fund   merely   upon   the   promissory  notes    of  shareholders; 
cannot    put    bank-notes   into   circulation    even  by  the  ex- 
pedient  of   sending   them    far    from    home    before    issuing 
them,  without  considering  how  they  are  to  be  redeemed;  can- 
not lend  money  on  land,  or  lock  it  up  in  other  wavs,  and  also 
have  it  again  when  the  bank's  debts,   exigible  on  demand, 


Wl  to  be  paid.  Indeed  it  was  a  time  when  cvirv  vagary  in 
unsound  banking  was  being  tried.  But  Hamilton,  from  some 
of  these  experiences  and  from  European  history,  planned 
for  you  a  banking  system  which  contained  much  oi  what 
is  good  in  the  successful  systems  of  the  worUl.  Vou  would 
not,  however,  have  his  system,  but  preferred  to  repeat  in  each 
new  district,  from  east  to  south  and  west,  wherever  debt  and 
ignorance  combmed  to  create  banking  and  currency,  the 
same  errors  which  make  such  startling  history  in  the  early 
part  of  the  nineteenth  century.  Is  it  not  time  tor  us  to  put 
aside  that  silly  vanity  to  which  democracies  arc  inclined -that 
it  is  better  to  try  our  own  experiments  and  to  ignore  history? 
Unfortunately  the  apparently  brand  new  experiments  we 
are  willing  to  try  have  usually  occurred  to  others  in  the  past, 
if  we  had  but  patience  to  discover  the  fact. 

I  may  as  well  at  this  point  admit  that  I  have  nothing  new 
to  say.     I  am  merely  trying  to  put  facts  and  arguments  made 
many  years  ago  into  a  new  form.     We  are  dealing  with  a  case 
where  the  patient  has  immediately  after  e.-    i  serious  illness 
exclaimed:    "What  shall  I  do  to  be  saved       has  repeatedly 
been  given  good  advice  by  the  experts  ol  nis  own  country, 
and  has  never  yet  in  any  particular  acted  in  accorrlan^e  with 
such  advice.     What  ->eems  to  be  necessary  is  not  so  much    d 
suggest  means  of  reform,  as  to  induce  the  patient  to  beli< 
firmly,  once  and  for  all,  that  if  he  persistently  neglects  : 
remedial  measures  the  next  attack  may  leave  him  in  a  state 
past  aM  aid.    Any  purpose  I  have  in  reading  this  paper  will  be 
amply  served  if  I  can  for  one  brief  moment  lav  emphasis  upon 
the  disagreeable  fact  that  whUe  reform  in  the  banking  and 
currency  systems  of  the  United  States  is  absolutely  necessary, 
there  is  no  probability  whatever  that  any  substantial  reform 
will  take  place  at  the  moment. 

The  profound  line  of  cleavage  which  made  it  so  difficult  to 
create  the  first  Bank  of  the  United  States,  and  which  de- 
stroyed it  and  its  successor,  still  exists.  It  lies  between  those 
who  favour  a  system  of  banking  good  for  the  nation  as  a  whole, 
as  opposed  to  a  system  of  banking  whir.i  may  be  right  or 
wrong  for  the  great  number  of  units  engaged  in  the  business 


of  banking,  but  which  is  clearly  not  right  for  the  nation  as  a 
whole. 

It  is  not  possible  in  the  short  time  at  my  disposal  to  review 
all  of  the  features  in  the  banking  of  the  United  States  in  which 
the  obstacle  to  reform  lies  mainly  or  altogether  in  the  existence 
of  numerous  small  banks,  but  with  your  permission  1  shall 
take  up  a  few  of  the  leading  features. 

RESERVES. 

Most  prominently  I  would  place  the  so-called  fixed  re- 
serves—the attempt  by  law  to  fix  the  minimum  percentage  of 
cash  to  be  held  by  each  bank  against  its  liabilities. 

The  real  reserve  requirements  of  any  particular  bank  differ 
from  those  of  other  banks  in  accordance  with  the  nature  of  its 
obligations  as  compared  wiih  theirs.  It  is  conceivable  that 
the  ideal  point  at  which  cash  reserves  should  be  kept  would 
be  different  in  the  case  of  any  ten  or  twenty  banks  v^hich 
you  might  select  for  comparison  even  in  the  same  city  or 
community.  The  bank  which  acts  mainly  as  a  banker  for  other 
banks  needs  very  large  reserves  indeed.  A  bank  in  the  same 
city  doing  mainly  the  business  of  manufacturers,  merchants, 
exporters,  etc.,  will  need  altogether  smaller  reserves,  and  a 
bank  gathering  the  savings  of  a  quiet  country  community 
needs  much  less  again.  The  law  attempts  to  recognize  these 
facts,  but  is  evidently  unable  to  do  so  except  in  a  most  imperfect 
manner.  Clearly  each  bank,  if  it  could  be  trusted  to  have 
sufficient  intelligence,  should  be  the  judge  of  the  reserves  it 
should  keep,  and  it  seems  safe  to  say  that  if  you  had  continued 
to  create  large  banks  with  branches,  instead  of  thousands  of 
small  banks,  the  attempt  to  provide  wisdom  by  law  would 
never  have  been  made.  You  wou;d  doubtless  have  done  as 
all  other  nations  have  done,  and  not  have  been  an  exception 
to  so  general  a  rule. 

If  the  wrong  done  only  resulted  in  causing  some  banks 
to  keep  more  reserves  than  they  actually  required,  little  would 
need  to  be  said  ;  but,  as  has  been  shown,  the  law  can  be  so 
worked  as  to  provide  reserves  quite  too  small,  and  experience 
shows  that  banks  as  a  rule  choose  to  keep  reserves  larger  than 


the  law  requires.  The  defect  in  the  law,  however,  is  that  by 
arbitrarily  fixing  the  minimum  reserves  which  must  be  always 
in  hand,  it  practically  forbids  the  use  of  the  reserves  for  the 
very  purpose  for  which  they  have  been  created.  The  law  under- 
takes to  supply  that  wisdom  which  it  presumes  the  thousands 
of  bankers  do  not  all  possess,  and  to  lay  by  for  them  against 
the  ramy  day  the  provision  which  it  presumes  they 
would  not  be  prudent  enough  to  make.  But  who  is  to  supply 
the  wisdom  demanded  by  such  authorities  as  Walter  Bagehot, 
who  says  that  in  a  panic  the  sound  banker  should  lend  to  the 
bottom  of  his  box?  In  times  of  peace  the  wise  prepare  for 
war,  but  when  war  comes  the  army  is  flung  into  the  field,  not 
still  held  in  reserve.  The  law,  however,  having  forced  the 
sequestration  of  so  much  cash  and  cash  resources  against  the 
day  of  trouble,  provides  no  means  by  which,  either  under  its 
own  wise  and  paternal  direction  or  at  the  discretion  of  the 
bankers  unaided  by  the  wisdom  of  the  law,  the  cash  thus 
provided  may  be  used  to  avert  disaster. 

I  do  not  wish  to  be  understood  as  claiming  that  the  present 
law  should  be  repealed  and  the  thousands  of  individual  banks 
be  left  to  do  as  they  like.  I  presume  it  is  true  that  they 
cannot  be  trusted,  and  that  because  of  the  folly  which  de- 
stroyed a  more  natural  system  of  banking  you  have  con- 
demned yourselves  to  submit  to  a  paternalism  which  fixes 
your  cash  reserves  for  you.  But  I  urge  as  one  of  the  great 
evidences  of  the  unnaturalness  of  your  system  of  individual 
banks  the  fact  that  they  cannot  be  trusted  to  take  care  of 
their  own  reserves,  and  that  no  law  has  been  devised  which 
will  act  the  part  of  Providence  for  them.  I  do  not  maintain 
that  where  the  banks  are  larger  relativelv  to  the  country,  as 
in  Canada,  they  are  always  wise  enough  to  keep  sufficient 
reserves.  It  is,  as  we  know,  a  subject  much  discussed  in 
many  countries,  and  it  would  be  well  indeed  if  banks  could 
in  some  way  be  forced  to  keep  larger  reserves,  provided  there 
be  no  interference  with  the  use  of  these  reserves  when  the 
hour  of  danger  arrives. 

Everybody  admits  the  mischief  created  in  the  United 
States  from  the  inability  to  use  legally  the  reserves  for  the 


very  purpose  for  which  they  are  held,  and  I  do  not  remember 
that  anyone  has  suggested  a  better  remedy  than  that  which 
takes  place  in  every  panic,  viz.,  the  breaking  of  the  law  by 
simply  not  maintaining  the  reserves.  But  through  the  press 
the  public  is  kept  keenly  aware  as  to  the  exact  point  in  the 
New  York  reserves  below  which  the  use  of  them  will  be  illegal, 
and  thus  the  panic  is  increased  by  the  very  attempt  to  get 
at  the  cash  necessary  to  allay  it,  while  under  any  ordinary 
system  the  panic  could  probably  be  averted  altogether  by  a 
wise  use  of  the  cash  in  hand,  instead  of  being  allowed  to  reach 
a  stage  where  it  can  only  be  stopped  by  almost  superhuman 
efforts  after  it  has  run  part  of  its  course  of  ruin  and  disaster. 
I  think  that  the  statement  on  the  opposite  page  will  show 
that  almost  every  panic  since  the  war  could  have  been  pre- 
vented or  arrested  early  in  its  course  by  the  natural  use  of 
only  a  reasonable  part  of  the  actual  cash  in  hand. 

CLEARING   HOUSE   CERTIFICATES   AND 
RE-DISCOUNTS. 

In  order  to  avert  panics,  and  also  in  order  to  avert  the 
failure  of  an  individual  bank  with  sound  assets,  something 
more  may  be  necessary  than  the  unrestrained  use  of  the 
cash  and  quick  assets  in  hand.  The  ability  to  re-discount 
should  exist  somewhere  within  reach.  The  great  banks  of  a 
country  should  manage  so  as  not  to  require  such  aid,  but 
small  banks  in  most  countries  require  it  from  time  to  time, 
and  not  merely  at  the  moment  of  a  panic.  Under  ordinary 
conditions  a  bank  in  the  United  States  requiring  to  re-discount 
some  of  its  paper  can  do  so,  but  if  there  is  any  financial  strain 
all  bankers,  big  and  little,  begin  to  button  up  their  pockets 
and  re-discounts  soon  become  nearly  impossible.  Indeed, 
instead  of  the  banks  in  the  great  financial  centres,  where  alone 
the  power  to  aid  could  be  expected  to  exist,  being  able  to 
help  their  country  friends,  some  of  them  are  soon  unable  to 
get  along  without  aid  from  other  members  of  their  own  city 
clearing-house.  But  there  are  almost  no  banks  of  suffi- 
cient national  importance  to  feel  the  necessity  of  aiding 
directly  their  weaker  brethren,  whether  it  is  convenient  to  do 

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so  or  not,  and  thus  the  clearing-house  certificate  came  into 
use.  It  is  not  only  a  splendid  tribute  to  the  genius  of  the 
American  people  for  organization,  but  so  long  as  its  use  is 
between  banks  alone  it  is  a  perfectly  natural  and  a  most 
effective  plan  for  allaying  a  panic  that  has  once  been  created. 
It  could  also  be  made  an  instrument  in  connection  with  a 
proper  use  of  reserves,  to  largely  avert  panics,  if  only  some 
wise  autocrat  could  be  entrusted  to  decide  when  clearing-house 
certificates  should  be  issued,  but  as  to  the  moment  of  necessity 
there  is  never  likely  to  be  unanimity  of  opinion  so  long  as 
the  decision  depends  on  the  judgment  of  several  bankers.  And 
therefore  the  illegal  use  of  the  cash  reserves  and  the  issue  of 
clearing-house  certificates  must  always  come  too  late  to  pre- 
vent the  panic.  They  nay  alleviate  and  cure,  but  they  are  not 
available  to  prevent.  Still  they  are  such  a  natural  and  efficient 
means  of  making  the  banks  who  have  abundant  reserves  help 
those  who  have  not,  that  we  may  expect  to  see  clearing- 
house certificates  or  something  closely  akin  to  them  in  other 
countries  where  there  is  no  great  state  bank  to  whom 
smaller  banks  may  go  with  some  show  of  right. 

Until  the  latest  panic  these  loan  certificates  were  only 
issued  in  the  largest  money  centres,  but  on  this  occasion  they 
were  issued  by  fifty-one  clearing-houses,  and  doubtless  in  the 
course  of  future  panics  they  will  become  practically  available  to 
every  bank.  The  wide  extension  of  their  use,  however,  raises  a 
new  question.  Used  in  the  real  m'^ney  centres  and  issued 
only  in  large  blocks  between  banks  they  remain  what  they 
were  intended  to  be,  mere  loan  obligations  assisting  banks 
to  build  up  their  reserves,  and  also  enabling  them  to 
make  additional  loans  to  customers  who  but  for  such  aid 
might  fail.  But  the  extension  of  their  use  to  numerous 
cities  and  towns  where  actual  cash  supplies  are  nearly  ex- 
hausted, and  the  issue  of  these  loan  certificates  in  small  de- 
nominations to  the  general  public  as  currency,  in  open  defiance 
of  law,  while  creditable  to  the  ingenuity  and  audacity  of  the 
American  people,  are  new  features  of  an  alarming  charac„/. 
There  are  dangerous  expedients  we  praise  ourselves  for  re- 
sorting to  when  heroic  action  is  necessary  for  the  general 


safety,  but  which  are  little  better  than  crimes  if  thev  are 
repeated.     An  able    banker*  has  referred  to  clearing-house 
certificates  as  an  "emergency  circulation,"  and  as  an  "asset 
currency"  that  even  he  would  approve  of.     I  think  much 
mischief  will  arise  if  these  loan  certificates  are  ever  generally 
regarded  as  anything  other  than  what  they  were  originally— 
a  species  of  re-discounts  between  banks.     Currency,   to  be 
such,  should  be  available  between  the  banks  and  the  people, 
and  should  surely  be  legal  whether  it  is  wisely  issued  or  not. 
But  before  leaving  the  subject   of   clearing-house   certi- 
ficates let  us  consider  how  their  use,  and  volume,  and  abuse, 
are  affected  by  the  existence  of  thousands  of  individual  banks 
instead  of  a  comparatively  few  large  banks  with  branches. 
Whether  we  have  one  system  or  the  other  the  actual  cash 
will  accumulate  largely  in  the  few  great  monetary  centres. 
In  the  case  of  individual  country  banks  the  cash  not  needed 
at  home  goes  to  their  reserve  agents,  while  in  the  branch 
system  the  series  of  branches  of  any  one  bank  are  practically 
one  clearing-house  with  a  settled   tendency  to   accumulate 
actual  cash  beyond  the  mere  necessities  of    the  till  in  the 
money  centres.     While  .stained  in  these  centres,  the  cash, 
except  to  the  extent  of  the  reserves,  will  be  employed  in 
some  manner  so  as  to  earn  interest.     Now,  the  extent  of  the 
reserves  necessary  on  the  one  hand  and  the  extent  to  which 
the  surplus  funds  may  be  lent  on  the  other  is  a  matter  of 
experience  in  both  systems,  but  the  experience  is  very  different 
indeed.     If  we  take  as  examples  a  bank  in  a  reserve  city  with 
one  hundred  banks  as  correspondents,  and  a  single  bank  in 
another  country  with  one  hundred  branches,  we  can  readily 
see  the  difference.     In  times  of  strain  the  one  hundred  branch 
managers  do  not  ask  for  cash  from  the  head  office  unless  it  is 
actually  needed;    on  the  contrary,  the  moment  contraction 
if  loans  begins  they  are  a  source  of  strength  to  the  head  office. 
The  credit  affected  and  the  thing  to  be  managed  is  one  organ- 
ism.    Within  this  organism  fear  of  each  other  by  its  compon- 
ent parts  will  not  enter,  and  whatever  courage  its  executive 

p.t.7"''°7    '^1  I'"'"'.  "P«fri"g-Houle   Ccrlificates   •nd    the   Need   (or   s   Central 
Bank.'  —Annali  Am.  Atad.  Pol.  and  Six.  Scinta,  March,  1908  >-eniral 


possesses  wUl  actuate  every  part  of  the  organism.     But  in 
the  other  case  there  are  a  hundred  organisms  and  no  cohesion, 
except  that,  the  skies  being  bright,  all  will  cohere  somewhat, 
not  with  each  other,  but  with  the  one  bank  in  the  reserve  city. 
And  if  the  skies  are  overcast  we  have  a  hundred  utterly  selfish 
organisms  all  concluding  that  their  balance  with  the  bank  in 
the  reserve  city  would  be  better  in  their  own  vaults;   in  any 
event  they  would  sleep  better  if  it  were  there.     And  so  we 
have  the  extraordinary  spectacle  which  accompanies  every 
panic  in  the  United  States  of  each  particular  one   of   the 
thousan<'s  of  banks  trying  to  stand  alone,  except  to  the 
extent  that  the  clearing-house  certificates  have  made  them 
cohere.     Almost  every  bank  wishes  to  withdraw  its  balance 
with  other  banks,  and  as  this  is  an  absolute  impossibility,  the 
panic  reaches  its  crisis,  currency  payments  are  suspended,  all 
currency  is  hoarded  and  passes  to  a  really  large  premium,  and 
the  ingenious  expedients  to  which  we  have  referred,  whether 
legal  or  not,  are  made  use  of  with  that  general  concurrence 
by  the  people  and  the  banks  which  only  exists  in  the  face  of  a 
great  national  danger.     The  great  national  danger  is  that  the 
panic  may  cause  national  ruin.     But  what  is  a  panic?     A 
widespread  fear  without  cause.     In  most  countries  financial 
panic  is  caused  by  fear  on  the  part  of  those  who  are  not  a  part 
of  the  national  finance— who  are  not  bankers  and  such.     But 
in  the  United  States,  whoever  may  start  the  panic,  those  who 
accentuate  it  most  are  the  thousands  of  individual  banks  by 
their  distrust  of  each  other.     We  speak  indignantly  about  the 
private  individual  who  draws  his  deposit  in  currency  and 
hoards  it.      But  in  time  of  panic  the  most  active  agency  in 
drawing  out  currency  and  hoa:  iing  it,  is  the  country  bank. 
And  it  is  not  the  fear  of  the  failure  ot  banks,  but  the  fear  of  the 
disappearauce   of    currency,   which   aggravates   panics   and 
brings  about  disaster  and  terrible  reduction  in  values.    To 
sum  it  up,  it  would  appear  that  the  same  elements  which  in 
the  United  States  cause  panics  of  the  most  ruinous  character 
would  not  be  apt  to  cause  panic  at  all  in  better  regulated 
countries.     In  such  other  countries,  firstly,  the  reserved  cash 
would  be  instantly  avaUable;  secondly,  the  banks  would  not  be 


likely  to  fear  one  another,  but  would  cohere  in  meeting  any 
panicky  feeling  on  the  part  of  the  public ;  thirdly ,  the  power  of 
re-discounting  or  of  issuing  clearing-house  certificates  would 
need  to  be  used  to  but  a  small  degree  if  onlv  the  demands  of 
the  public  had  to  be  met  and  not  the  demands  of  thousands 
of  radividual  banks;  fourthly,  with  these  things  assured  and  a 
reasonably  flexible  currency,  no  stoppage  of  currency  pay- 
ments would  be  likely  to  arise. 

THE    TREASURY    SYSTEM. 

FlexibUity  in  the  use  of  cash  reserves,  in  obtaining  re- 
discounts, in  distributing  Treasury  balances,  and  in  the  issue 
of  bank  currency,  still  seem  the  main  features  to  be  discussed 
I  have  little  to  add  to  what  was  said  years  ago  regarding  the 
Treasury.     Then  it  needed  some  courage  to  say  it,  but  now 
even  a  Comptroller  of  the  Treasury,  writing  early  in  1908, 
does  not  hesitate  to  sum  up  the  whole  evil  in  the  following 
frank  statement:*   "But  look  at  the  situation.    The  United 
States  Government  has  collected  from  its  people  $245,000,000 
surplus,  above  its  necessary  expenditures,  and  in  order  to 
restore  this  money  to  circulation  and  repair  the  damage  done 
to  business  by  its  withdrawal,  has  had  to  deposit  $222,000,000 
with  the  national  banks;  and  when  the  supply  of  Governinent 
Bonds  gave  out,  has  had  to  accept  various  other  bonds  as 
security."     And  in  the  same  connection  he  says  of  Secretaries 
Gage,  Shaw  and  Cortelyou,  that  "they  are  all  entitled  to  the 
highest  praise  and  commendation  for  what  they  have  done  to 
make  the  best  of  bad  situations,  with  antiquated,  complicated 
and   cumbersome   faculties,    often   little   better    than    mere 
make-shifts."     But  why  not  face  the  fact  that  the  present 
Treasury  system  was  created  because  of  the  destruction  of 
the  system  of  large  banks  in  favor  of  the  system    of   small 
banks,  and  would  never  have  existed  otherwise?    Under  the 
present  system  there  is  no  one  bank  and  no  scries  of  banks  to 
whom  the  United  States  people,  as  they  are  represented  by 
the  Federal  Government,  can  entrust  their  balances  without 


'3 


very  complicated  arrangements,  including  the  deposit  of 
security.  Whatever  may  be  the  remedy,  in  the  meantime 
we  must  add  the  Treasury  system  to  that  list  of  abnormal 
features  which  this  country  has  to  bear  because  of  its 
thousands  of  individual  banks. 


BANK-NOTE    ISSUES. 

The  fourth  main  element  in  banking  in  which  flexibility 
is  necessary  is  bank-note  issues.  This  has  become  a  hack- 
neyed subject  during  the  last  fifteen  years  or  more,  but  indeed 
it  has  never  been  long  out  of  the  arena  of  discussion  regarding 
banking  in  this  country  since  early  colonial  days.  The 
currency,  as  we  have  said,  is  a  complicated  mystery,  and 
for  that  reason  it  has  a  strong  hold  upon  the  imagination 
of  the  average  man.  But  in  addressing  an  audience  of 
bankers  it  might  be  well  to  avoid  the  broader  definition  of 
money,  and  to  try  and  separate  the  credit  instruments 
usually  issued  by  banks  and  passing  as  money,  from 
metallic  money,  paper  money  representing  metallic  money, 
and  paper  money  based  on  the  debt  of  a  government. 
The  species  and  quantities  of  money  current  in  the  United 
States  on  ist  August  were  approximately  as  follows:— 

Gold  Coin  and  Bullion 8811,541,020 

Silver  Dollars 79'.303!982 

Sub.sidiary  Silver 147,005,385 

Gold  Certificates 818.758.869 

Sliver  Certificates 484.054,000 

United  States  Notes 346,681,016 

Treasury  Xotes  of  1800 4  993  000 

National  Bank  .Votes 692,088!991 

$,!,384,336,263 

K„lliL'"'/^"i'  '^'[f"„"''°r,j°  "t  ',Tl"^.J  *"  ^l™"'!'"'  amount  of  gold  coin  ud 
bullion  and  silver  dollars  held  in  the  U.S.  Treasury  as  a  redemption  fund  for  the  sold 

*»ro,'.vi',"Ne',rY"kT   °»'"*""""«-''r»^™    '">»    ''*•   C<mm.,cicl   0»d   F.Wnriol 

F  om  this  it  is  apparent  that  in  the  United  States  there  is 
no  currency  of  the  kind  usually  known  as  bank-note  issues, 
the  notes  issued  by  national  banks  and  guaranteed  by  the 
Govemmeiit  being  a  species  of  money  based  on  the  debt  of  a 

'4 


Government.     There  were  bank-note  issues  before  the  war, 
and,  as  we   know,  they  were  retired    for  arbitrary  reasons 
connected  with  the  finances  of  the  Clovernment,  and  not  for 
the  purpose  of  improving  the  system  of  banking.     We  also 
know  that  while  the  national  bank-notes  which  took  their 
place  possess  good  qualities  not  possessed  by  the  old  state- 
bank  issues,  they  also  carry  with  them  the  grave  defect  of 
rigidity  which  accompanies  nearly  all  Government  note  issues. 
Under  the  new  "Currency  Association  Law,"  permitting  an 
emergency  circulation,  bank-issues  are  to  be  permitted,  tut 
under  restrictions  which  practically  amount  to  an  admission 
that  the  issuing  of  credit  notes  is  too  dangerous  a  franchise 
to  be  granted  to  a  bank  under  ordinary  circumstances.     In- 
deed, the  whole  machinery  for  these  emergency  issues  is  so 
difficult  that   the   Act   may  quite  fail   i;i   its  purpose.     In 
Canada  at  about  the  same  time  we  also  passed  an  Act  per- 
mitting an  emergency  circulation.     Our  Act   contains  967 
words,  while  that  part  of  your  Act  which  deals  with  emergency 
circulation  contains  3730  words.  This  is  not  a  very  reliable 
manner  in  which  to  compare  the  respective  value  of  two  Acts 
of  legislation,  but  in  this  case  it  may  be  said  that  the  differ- 
ence in  words  fairly  represents  the  difference  in  ease  with 
which  the  additional  franchise  of  an  emergency  circulation 
may  be  given  to  a  few  large  banks  with  branches  as  compared 
with  thousands  of  individual  banks. 

Returning  to  the  ordinary  currency,  we  find  that  with  the 
exception  of  the  gold  coin  and  paper  money  directly  based 
on  gold  coin,  all  of  the  vast  remainder  is  currency  created 
for  some  reason  not  concerned  with  the  benefit  of  the  business 
of  banking,  or,  what  should  be  the  same  thing,  of  trade 
generally.  We  see  fiat  money  rendered  necessary  by  the  war 
but  not  since  funded  or  redeemed ;  depreciated  silver,  or  its 
paper  representative,  kept  at  a  gold  equivalent  by  the  good 
credit  of  the  United  States,  a  sort  of  half  metallic— half  fiat 
money;  and  bank-issues,  so-called,  which  are  merely  indirect 
evidences  of  Government  debt  Now,  if  these  species  of 
currency  piovide  all  that  is  necessary  in  the  interest  of  trade, 
no  one,  in  the  interest  of  the  banks  alone,  has  the  right  to 

IS 


complain.       But  is  it   possible   tliat  under  modem   credit 
conditions  the  peculiar  functions  which  in  most  countries 
are   performed  by  the  credit-notes   of   a   bank  should   be 
performed  by  a  mass  of  currency  which  if  not  constant  in 
volume  is  so  nearly  so  that  its  non-use  at  once  represents 
to   any   holder  except  the  Treasury   the   loss   of  so   much 
interest?      Let     us    consider    once  more   the   functions   of 
the    credit-notes    of    a  bank.     There   are  stUl  people   who 
imagine    that    a    natural    and    quite    desirable    condition 
would  be  one    where,  whenever    money   is    given   as    .he 
purchase  price  of  a  commodity,  that  money  should  either  be 
gold  or  a  sUver  equivalent,  or,  if  paper  is  used,  that  the  paper 
should  be  actually  represented  by  an  equivalent  amount  of 
gold  or  sUver  practically  ear-marked  for  the  purpose.     As 
we  know,  there  is  not  sufficient  coin  in  the  world  to  make  this 
even  remotely  possible.     As  we  also  know,  the  trade  of  this 
country  is  rendered  possible  only  by  cheques,  drafts,  clearing- 
houses, paper  money  of  the  various  kinds  we  have  referred  to, 
and  various  other  substitutes  for  money  which  in  the  main 
merely  shift  the  credits  and  debits  between  different  individ- 
uals and  institutions.     We  shall  never  return  to  the  simpler 
conditions  of  the  use  of  money  which  closely  followed  barter, 
and  I  presume  we  do  not  wish  to.    But  if  we  do  not  this  nation 
must  manage  somehow  to  achieve  its  large  volume  of  trading, 
done  so  largely  by  credit  instruments,  in  such  a  manner  as  to 
avoid  panics  and  such  violent  changes  in  prices  as  cause  wide- 
spread ruin.    Let  us  be  frank  with  one  another  and  admit  that 
you  have  been  quite  unable  to  do  this.     You  have  achieved 
the  huge  volume  of  trade;  you  have  achieved  the  necessary 
transportation— most  difficult  of  problems  usually;  but  you 
apparently  cannot  manage  the  shifting  of  credits   without 
panic     You  constantly  fall  short  of  currency,  and  the  fear 
of  this  accentuates  the  difficulty  so  much  that  sometimes 
those  who  have  the  power  to  do  so  lock  all  the  currency  up 
and    leave    the    country    without    the    necessary    financial 
machinery  with  which  to  carry  on  business. 

There  are  countries  in  the  old  world  where  the  fluctuations 
in  the  volume  of  trade  and  in  the  price  of  commodities  and 


Kcurities  from  one  year  to  another,  and  fron  one  part  of  the 
year  to  another,  are  not  so  violent  as  to  require  much  elasticity 
in  the  currency.     But  in  the  United  States,  where  the  volume 
of  trade  and  the  price  of  commodities  and   securities    vary 
largely  from   one  period  of   contraction  through  a   period 
of  expansion  to  the  next   period  of  contraction,  and  from 
one  year  to   auother,  and  from  one   part   of  a    year   to 
another,  and  from  day  to  day,  there  should  be,  in  addition 
to    the    constantly  varying  total   of    chequ    ,   drafts,   and 
such  credit  instruments  with  which  mo;;t  of  our  trade  is  done, 
a  species  of  credit-note  issuable  by  banks  which  can  be  varied 
in  total  quantity  in  proportion  as  the  total  quantity  of  trade 
done  with  such  instruments  of  credit  varies.     And  there  is 
the  additional  reason  for  such  a  credit-note  that  whenever, 
because  of  panic  or  any  form  of  distrust,  the  ordinary  currency 
is  hoarded  or  additional  cash  is  being  held  by  banks  as  re- 
serves, some  legal  credit  currency  becomes  more  than  ever 
necessary.     No  one  at  this  late  day  will  advocate  the  issue 
of  such  a  credit  currency  unless  it  is  perfectly  safe.     I  know 
the  history  of  paper  money  in  the  United  States  from  colonial 
times  down  to  date  well  enough  to  know  that  in  suggesting 
credit  paper  money  the  long  and  dismal  history  of  disastrous 
experiment  in  this  country  comes  up  as  a  sort  of  bogey. 
I  was  engaged  in  business  early  enough  to  remember  the  last 
of  the  state-bank  issues  which  in  the  case  of  solvent  banks 
passed  at  a  discount  if  geographically  distant,  and  at  a  larger 
discount  if  the  bank  laws  of  the  particular  State  in  which  the 
note  was  issued  were  supposed  to  favor  loose  habits  or  undue 
risk  in  banking.     But  it  is  to  the  last  degree  unfair  to  judge 
any  of  the  recent  suggestions  for  an  asset  currency  by  ante 
bellum  experiences.     A  currency  issued  to  the  extent  of  the 
paid-up  capital  or  less,   as   you   have   generally  proposed; 
secured  as  your  National  bank-notes  now  are,  by  a  first  lien 
on  the  assets  of   the  bank  including  the  double  liability  but 
not  by  anything  specially  deposited  or  ear-r-.arked ;  further 
secured   by  an  insurance  fund;   and  bearing  a  fair  rate  of 
interest  if  not  paid  by   the    liquidator    immediately   after 
suspension,    is    perfectly    safe  in  any  country  where  daily 

17 


redemption  can  and  will  .urely  be  effected.  The  whole 
difficulty  in  carrying  out  such  a  plan  in  this  country 
lies  in  the  fact  tha>  you  have  become  used  to  a  system 
which  requires  practically  no  redemption,  and  with  so 
many  thousands  of  banks  you  do  not  quite  know  how,  or 
you  are  not  quite  willing  to  take  the  trouble  to  establish  the 
complicated  machinery  necessary  to  effect  such  daily  re- 
demption. ' 

Tl  he  issues  proposed  are  credit-notes,  while  National 
bank-note,  are  not.  and  that  they  must  be  subjected  to  actual 
daily  redemption,  while  National  bank-notes  need  not,  should 
never  be  lost  siRl.t  of  for  a  moment.  One  of  the  greatest 
elements  of  safety  in  such  issues  lies  in  the  fact  that  having 
performed  the  credit  service  required  they  will  immediately 
come  back  for  redemption.  But  some  of  you  will  ask  how 
with  thousands  of  banks  can  you  prevent  a  bank  in  Kan- 
sas arranging  with  a  bank  in  Oregon  to  circulate  each  other's 
notes  so  that  the  volume  kept  out  would  be  increased 
by  the  geographical  distance  on  the  one  hand,  while 
the  difficulty  and  expense  of  returning  for  redemption 
would  be  made  unbearable  on  the  other?  Clearlv  by 
organization  you  could  prevent  this,  but  it  is  rendered  so 
troublesome  by  the  many  thousands  of  banks  that  you 
doubtless  will  not  do  so.  But  again  it  seems  that  the  obstacle 
to  flexibi  ity  in  your  currency  also  lies  in  your  thousands  of 
individual  banks. 

CENTRAL   BANK. 

There  are  practically  only  two  directions  in  which  those 
who  desire  reform  are  looking  for  aid.  These  may  be 
summarized  as  follows:— 

(a).  Plans  differing  in  detail,  but  looking  to  the  creation 
of  a  credit-note  system  of  bank  currency  based  upon  the 
assets,  somewhat  similar  to  that  in  use  in  Canada,  although 
much  more  restricted  in  the  extent  of  the  powers  or 
franchise  to  be  granted. 

(6).  Plans  differing  in  detaU,  but  looking  to  the  creation 
of  one  centra!  bank,  which  alone  is  to  have  the  franchise  of 
issuing  credit-notes. 

i8 


In  the  most  comprehensive  form  which  I  nave  seen,  the  pro- 
posal to  form  a  central  bank  sets  out  the  following  features  —• 

1.  A  capital  of  say  1100,000,000  to  be  invested  in  Govern- 
ment Bonds. 

2.  The  shareholders  to  be  National  banks,  and  possibly 
also.  State  banks.  '' 

3.  To  issue  its  notes,  say  for  $300,000,000,  in  exchange  for 
gold  provided  by  the  banks  who  become  shareholders. 

4.  To  be  authorized  to  issue  additional  notes  up  to  say 
$600,000,000,  provided  a  gold  reserve  of  at  least  33i  per  cent, 
of  the  whole  issue  is  maintained. 

5.  The  central  bank  to  use  its  powers  of  lending  merely  by 
re-discounting  for  or  lending  to  the  other  banks  of  the  country. 

6.  The  shareholders  to  be  represented  by  a  board  of 
directors  elected  by  territorial  districts. 

7.  The  Government  also  to  be  represented  in  the  direc- 
torate by  officers  of  the  Treasure-  Department. 

Among  the  merits  claimed  for  such  a  central  bank  are  the 
following : — 

(a).  It  would  remove  the  nuisance  of  the  Treasury  and 
cause  the  balances  of  the  Federal  Government  to  be  available 
as  lending  caj^ital  when  necessary. 

(b).    It  would  not,  like  the  two  banks  of  the  United  States 
be  a  rival  to  other  banks,  because  the  latter  would  be  shar 
holders.   This,  however,  would  require  that  every  '  ank  created 
hereafter  should  have  the  same  right  to  proportionate  shares 
as  those  taking  shares  at  the  inception. 

(c).  It  would  probably  prevent  such  a  lack  of  currency 
at  any  one  time  as  to  cause  panic. 

{d).  It  would  to  some  extent  create  that  necpssarv  co- 
hesion among  banks  in  time  of  trouble  which  is  now  almost 
absent. 

(c).  It  would  steady  credit  so  much  as  to  set  the  pace  of 
confidence  among  the  smaller  banks. 

0')-  It  is  alleged  that  because  of  the  territorial  directorate 
ajid  notwithstanding  the  presence  of  Government  officials  oii 


Pd'STsS'fZ^-.ll^Ci^'  '>•-''  »'  '  C.n.r.1  B.„k.. 

>9 


-i4ifmj;i  Am.  Aead. 


the  board,  there  would  be  no  reason  to  fear  that  politics  might 
control  the  working  of  the  bank. 

Among  the  defects  of  such  a  system  which  have  been  or 
might  be  urged  are  the  following: — 

(o).  The  possible  customers  of  the  central  bank  would 
consist  of  eight  or  ten  thousand  banks,*  who  would  also  be  the 
shareholders.  It  would  be  necessary  to  satisfy  these  custom- 
ers that  the  favours  of  the  central  bank  were  distributed 
fairly,  and  especially  fairly  as  to  geographical  sections  of  the 
country.  This  would  make  it  necessary  for  the  central  bank 
to  know  the  credit  status  of  each  bank  and  of  each  customer 
of  each  bank,  or  at  least  of  those  customers  whose  paper  might 
be  offered  for  re-discount  or  who  might  require  a  loan.  It  is 
quite  true  that  the  number  of  banks  out  of  the  eight  or  ten 
thousand  requiring  re-discounts  or  loans  might  be  very  small 
relatively,  but  that  does  not  alter  the  quantity  of  knowledge 
necessary,  as  it  would  be  impossible  to  tell  in  advance  who 
might  at  any  moment  apply  for  such  accommodation.  And 
if  for  the  soundest  reason  a  re-discount  or  loan  were  refused, 
discontent  would  be  apt  to  result.  No  central  bank  elsewhere 
in  the  world  is  called  upon  to  perform  such  a  task,  and  I  fear 
it  is  impossible  of  satisfactory  performance. 

(6).  It  would  also  be  absolutely  necessary  to  keep  the 
customers  permanently  convinced  that  no  political  influence 
could  be  used  to  favour  one  customer  as  compared  with 
another,  or  one  district  as  compared  with  another.  Now,  it 
might  be  quite  possible  to  keep  political  influence  out  of  the 
management  of  the  bank,  although  surely  no  one  can  feel 
certain  as  to  this,  but  can  we  believe  that  in  a  country  where 
party  strife  is  so  keen,  the  customers  of  the  bank  and  the 
people  will  remain  continuously  convinced  of  this  fact? 

(c).  An  argument  against  such  a  central  bank,  which 
perhaps  will  appeal  more  strongly  to  a  Canadian  than  to  an 
American  banker,  is  that  as  the  central  bank  may  not  have 
any  customers  except  banks,  it  can  do  nothing  to  change  the 
state  of  affairs  now  existing  because  of  which  a  large  borrower 


•The  total  number  of  banks  is  larger  than  the  fifrures  here  mentioned;  there  are 
probably  fifteen  or  sixteen  thousand  banks  including  all  classes. 


may  have  either  to  keep  a  discount  account  with  a  great 
number  of  banks,  or  to  sell  his  paper  to  sometimes  as  many 
as  fifty  or  sixty  banks,  or  even  more,  through  the  medium  of 
a  note-broker.  This  clumsy  manner  of  borrowing  not  only 
prevents  that  close  intimacy  between  a  sound  borrower  and 
his  banker  which,  lasting  over  a  series  of  years,  tends  so  much 
to  create  firmly  cemented  credit  relations,  but  it  undeniably 
has  often  caused  perfectly  solvent  American  merchants  or 
manufacturers  to  fail — a  thing  which  in  other  countries  would 
be  regarded  as  reflecting  on  the  banks  of  such  countries. 

(d).  Another  argument  which  would  appeal  to  Canadian 
banks  and  to  all  other  bankers  engaged  in  financing  the  export 
and  import  business  of  the  United  States,  is  that  the  central 
bank,  having  no  customers  except  the  banks  of  the  United 
States,  could  do  little  to  build  up  the  foreign  exchange  busi- 
ness, which  is  still  done  mainly  by  bankers  other  than  the 
National  and  State  banks.  Now  that  you  own  the  Philip- 
pines and  the  Hawaiian  Islands,  now  that  your  foreign  trade 
is  increasing  so  rapidly  and,  should  your  tariff  be  lowered, 
will  increase  much  more  on  the  import  side,  surely  the  need 
of  great  banks  in  the  United  States  capable  of  establishing 
large  banking  connections  with  other  countries,  and  capable 
of  doing  a  large  international  business  themselves,  is  obvious. 

(e).  When  all  this  is  said,  however,  there  is  little  doubt 
but  that  a  central  bank,  if  wisely  administered,  would  be  an 
improvement  upon  the  present  conditions,  but  if  the  temper 
of  your  people  will  permit  such  a  departure  from  your  present 
system,  there  are  surely  better  plans  for  the  permanent  reform 
of  your  banking.  A  recent  writer,  who  is  strongly  opposed 
to  centralization  of  power  as  opposed  to  "states  rights,"  puts 
his  main  objection  to  a  central  bank  in  the  following  significant 
words  ;*  "  In  my  judgment  our  currency,  like  our  other  evils, 
is  to  be  remedied  by  greater  freedom  and  greater  distribution 
of  choice  and  discretion,  rather  than  by  a  greater  centralization 
or  unequal  distribution  of  power.  It  is  a  fair  question  to  ask, 
therefore,   whether  conceding,   as   I    do,  that   there   is  not 


•GeoraeH   Earle.Jr.:   ■  A  Central   Bank  as  a   Menace  to  Liberty."— 4nna/>  Am. 
Aead.  Pol.  and  Sx.  Scur^,  March.  1908. 


sufficient  elasticity  of  the  currency,  I  can  suggest  no  remedy, 
but  would  prefer  present  evils  to  those  resulting  from  the 
creation  of  too  centralized  a  power;  and  the  answer,  to  my 
mind,  is  obvious.  The  true  remedy  must  be  found,  not  in 
placing  our  dependence  upon  the  discretion  of  any  one,  but 
of  every  one, — that  is,  again,  upon  liberty,  rather  than  upon 
power  and  restraint."  Without  regard  to  whether  this  is 
in  the  abstract  a  wise  view  or  not,  I  think  we  must  admit  that 
it  is  distinctly  the  American  view  and  those  who  have  care- 
fully read  the  history  of  early  American  banking  will  recognize 
that  each  attempt  to  depart  from  it  has  aroused  most  passion- 
ate opposition. 

So  far  as  my  own  opinion  is  concerned,  J  (!o  not  find  that 
it  has  changed  materially  since  I  had  the  honour  of  addressing 
the  New  York  State  Bankers'  Association  in  1895.  I  felt 
doubtful  then  as  to  the  probability  of  the  necessary  reform 
being  acceptable  to  the  existing  bankers,  and  I  am  not  much 
more  hopeful  now.  But  if  the  people  are  willing  to  create  a 
central  bank,  with  the  monopoly  of  banking  which  would  be 
involved,  they  should  be  much  more  willing  to  create  a  series 
of  large  banks  which  could  perform  every  good  feature  of 
centralized  banking,  and  still  preserve  that  chief  safeguard 
of  the  people  in  industrial  matters,  viz.,  competition.  And 
even  if  the  people  and  the  bankers  are  not  willing,  I  need  not, 
I  suppose,  on  that  account  hesitate  to  state  what  I  happen 
to  regard  as  a  more  reasonable  solution  than  can  be  found  in 
any  other  direction. 

In  order  that  reform  may  be  permanent  and  effective  the 
new  species  of  bank  should  be  able  to  create : 

(1)  A  sound  credit  currency  with  effective  daily  redemption. 

(2)  A  distribution  of  capital  available  for  lending,  so  that 
it  shall  not  be  idle  and  congested  in  one  locality  and  scarce 
or  non-existent  and  proportionately  dear  in  another. 

(3)  A  condition  where  the  gold  and  other  cash  reserves 
of  the  country  may  be  made  more  effective  and  doubtless 
be  minimized  in  quantity. 

(4)  Where  in  time  of  trouble  the  capital  of  the  country  may 
be  mobile  and  capable  of  being  centralized  when  necessary. 


(5)  Where  there  may  be  banks  capable  of  doing  the 
entire  lending  business  of  your  merchants  and  manufacturers, 
except  where  these  are  unusually  large,  when  they  could 
be  divided  by  arrangement  between  two  or  three  banks. 

(6)  Where  a  great  international  banking  business  may 
be  created  and  you  may  do  justice  to  your  over-sea 
possessions,  to  the  great  ports  of  export  and  import, 
to  your  mercantile  marine,  and  to  your  position  among 
the  great  nations  of  the  earth. 

This  state  of  things  can,  I  think,  only  be  brought  about 
by  your  permitting  the  creation  of  banks  in  the  United  States 
similar  to  the  banks  of  other  countries.  As  I  have  tried  to 
show,  the  m  e  creation  of  one  central  bank  will  not  change 
the  defective  character  of  the  eight  or  ten  thousand  other 
banks.  The  suggestion  I  ventured  to  make  in  1895*,  and 
which  I  give  below  unaltered,  was  based  upon  the  National 
Banking  System  and  the  ten  per  cent,  tax  on  State  bank 
issues  being  allowed  to  remain  as  they  are,  and  the  new 
powers  to  be  added  to  those  enjoyed  by  a  National  bank  or 
to  be  enjoyed  by  banks  under  State  or  Federal  charters  as 
indicated  below: 

"Any  bank  with  a  paid-up  capital  of  81,000,000  or 
over,  to  be  allowed  to  issue  notes,  say  to  the  extent  of  75  per 
cent,  of  the  paid-up  capital,  secured  only  by  being  a  prior 
lien  on  the  assets  of  the  bank,  including  the  double  liabilif,. 
of  stockholders,  and  by  an  insurance  fund  of  say  five  per  cent., 
and  to  be  free  from  the  ten  per  cent.  tax.  Such  banks  to  be 
allowed  to  establish  branches  within  the  State  in  which  the 
head  office  is  situated.  If  the  franchise  is  granted  by  a  State 
the  Federal  Government  to  approve  of  the  regulations  securing 
the  note  issues,  and  to  hold  the  insurance  fund.  I  do  not  enter 
upon  the  question  of  what  the  minimum  paid-up  capital  should 
be  in  the  case  of  banks  desiring  to  avail  of  such  bank  issues  but 
not  to  open  branches.  I  hope,  however,  it  might  be  practic- 
able to  make  it  as  high  as  $500,000."t 

•B.  E.  Walker.    Addreaa  New  York  State  Bankers'  Association.  1895. 

t  In  saying  that  I  hope  it  may  be  as  high  as  $500,000  I  do  not  wish  to  be  misunder- 
stood. Provided  a  scheme  is  established  which  will  enforce  actual  daily  redemption, 
there  is  no  reason  why  banks  with  a  smaller  capital  than  (500.000  should  not  be 
allowed  to  avail  themselves  of  the  privilege  of  issuing  asset  currency. 

a3 


"  Any  bank  with  a  capital  of  say  $5,000,000  or  over,  to 
have  the  same  privileges  as  to  note  issues  and  to  be  allowed  to 
establish  branches  throughout  the  United  States  limited, 
if  thought  necessary,  to  cities  of  national  and  not  local  im- 
portance. Such  a  franchise  would,  I  suppose,  be  granted  by 
the  Federal  Government.  In  view  of  all  that  has  happened 
since  the  war,  I  presume  it  would  not  be  too  great  a  stretch 
of  Federal  power  to  grant  Juch  a  franchise." 

In  the  light  of  later  experience  I  should  think  that  banks 
having  power  to  establish  branches  throughout  the  whole  of 
the  United  States  and  its  over-sea  possessions  should  have 
a  larger  minimum  capital  than  $5,000,000.  This,  of  course, 
proposes  asset-currency,  and  I  am  aware  ol  the  arguments 
which  have  been  made  against  it.  But  no  effective  argument 
has  been  made  other  than  the  difficulty  of  applying  it  to 
thousands  of  relatively  small  banks,  and  effecting  that  daily 
redemption  which  is  indispensable.  That  it  can  safely  be 
applied  to  all  individual  banks  with  a  capital  of  $500,000  and 
over,  and  to  all  banks  with  branches  with  a  capital  of 
$1 ,000.000  and  over,  I  have  no  doubt  whatever.  That  it  is 
extremely  desirable  in  this  country  if  it  can  be  made  safe, 
I  am  quite  certain. 

But  quite  as  important  as  the  asset-currency,  to  my  mind, 
is  the  branch  system.  If  you  make  your  laws  so  that  it  is 
merely  permissive,  surely  the  branch  system  will  not  come 
into  being  in  an  important  degree  unless  it  is  right  in  principle. 
If  it  is  right  in  principle,  should  the  particular  interests  of  ten 
thousand  or  more  individual  banks  stand  in  the  way  of  a 
great  public  good  ? 

However  frank  1  may  have  been  I  have  not  dared  to 
strike  such  a  high  note  of  criticism  as  many  of  your  own 
bankers,  remembering  that  I  am  a  foreiijiier,  but  if  what  I 
have  said  offends  I  beg  you  to  forgive,  and  to  believe  that 
I  have  no  ends  to  serve,  and  have  spoken  out  of  a  full  heart 
that  which  'o  me  seems  to  be  tlie  thing  I  hope  we  are  all 
seeking — th--  truth. 

I  thank  you  most  heartily  for  your  patience  in  listening 
to  my  rather  lengthy  paper. 


=4 


